In search of pain-free cash management

Greater efficiency and the increasing importance of managing term deposits as more fund members move into retirement were hot topics as cash-management experts gathered recently.

Cash investments, the asset class that has been left behind? Is cash the oil that lubricates the machine? Is it the bane of the custodian or a necessary evil? What role will term deposits play in post-retirement member retention? And how can cash management be streamlined to facilitate more efficient implementation of instructions?

These were the questions considered by an expert panel from all along the cash management lifecycle, from superannuation fund to custodian to bank, at a recent roundtable discussion conducted by Investment Magazine and sponsored by Cashwerkz.

While there have been technological advances in other parts of investment and portfolio management, the cash-management function has received little attention. Panellists reported reliance on faxes and other manual and time-consuming processes.

Seamus Collins, head of portfolio implementation at Mine Super, said cash management had a number of different dimensions, including investment cash used in diversified options or cash-driven options, and term deposit books. For Mine Super, investable cash is managed by the in-house asset allocation team for diversified options. For the cash option, the money is managed in-house and externally by two cash managers, using a cash trust structure with a same-day application redemption strategy that “seems to work reasonably well”, Collins said. Further, Mine Super has a term deposit book.

Term deposits – the ‘pain point’

“Term deposits [require] a slightly more tedious process, and we largely run complex spreadsheets to track all our terms and maturities; that’s by and large a headache and a manual process,” Collins said. “We also have operational cash – a different category altogether – which we essentially try to manage down as tightly as possible. Some of that is with the custodian and we essentially manage [that] in-house to optimise that for margining for collateral needs and for daily member cash flows, but essentially, we’ve been pretty effective in managing that down.”

Mine Super leaves “a reasonable amount” of its cash with its custodian, and Collins notes that the biggest “pain point” in the discussion of managing cash is around term deposits.

“Would I like a custodian to have a little bit more of a transparent discussion on a cash-plus model with cash balances?” he asked. “Probably. But the reality is I’m pretty knowledgeable about how custodians treat cash, so I’m fine with that and move forward.”
Louise Gilmartin, head of investment operations at EISS Super, noted that the fund also has a cash option, managed externally by a single investment manager.

“All our cash is invested,” Gilmartin said. “We don’t actually have any cash sitting at the custodian like Mine does. It’s all invested into our investment manager. We tell them every day what’s coming in and out, and they have an 11.00am account there that they can draw on to facilitate the member cash flows coming in and out.

Strategic asset allocation at EISS Super is performed by the investment management team.

“Each of the individual options has a cash allocation and they will be reviewing, on a daily basis, what that cash allocation is, depending upon the option,” Gilmartin explained. “We have some reserves, they’re also in term deposits. But, again, we don’t really have a lot of money lying around, everything is invested fully. The one key thing for us, from an operational perspective, for term deposits, is getting a share certificate every time and having to send a proper instruction in to the custodian to do that.”

Swift adjustment

Gilmartin said it would be more efficient to receive the share deposit certificate via Society for Worldwide Interbank Financial Telecommunications [SWIFT] messaging, rather than directly.

Custodians view cash management as a two-part process as well. Sally Surgeon, head of client services, Australasia, at Northern Trust, says the starting point is providing the cash balances for clients, receiving the instructions and processing them. But while most investment managers tend to be SWIFT enabled, with the associated automation, asset-owner clients are not SWIFT enabled and can send instructions via fax, so the custodian has to be the facilitator in the instruction process.

“Things like term deposits tend to be more manual in nature; as Louise indicated, you’re waiting for instructions,” Surgeon said. “We have looked at ways to automate that process by providing an instruction portal. So that’s something relatively new that we’re rolling out at the moment. But it’s really about trying to make that process as seamless as possible for something that is quite manual and bespoke.”

She noted that at Northern Trust, when they receive an instruction from a superannuation fund client, they effect the transaction within the day.

Paul Toepfer, managing director, head of product Australia at State Street, noted similar processes and similar pain points if there is a paper-based message from a client.

“There’s the outbound, and how well we can electronically instruct the ADI [authorised deposit-taking institution] and what they have set up there, which either is a smooth or not so smooth process,” Toepfer said. “And then we’ve got the maturity piece as well and what happens upon maturity and different measures to make sure there is awareness around what’s happening at that point and then there’s action being taken.”

The transaction can slow down if there is a new investment from a superannuation fund, or if the custodian has to interact with a new ADI for the first time, because there’s more upfront work, Toepfer said.

“The process works, but there’s definitely time pressure in making sure the transactions occur and then you get the deal that’s actually been quoted to the investment team,” he said. “And so, there are things that need to be done in the required time to make that happen, and if there are paper-based instructions throughout, it’s definitely slower and it creates that pressure and risk.”

Simon Martin, head of multi-sector sales and business development at HSBC Securities Services, noted that the firm has adopted SWIFT messaging to accommodate automated communication amongst State Street, Northern Trust and itself.

“With State Street and Northern and our other clients, we’ve seen a really big adoption of SWIFT messaging,” Martin said. “So generally, when these go out, we will send a cash or SWIFT message confirming the cash payment has gone out. We can then send a follow-up SWIFT confirming that it’s settled. We’re starting to see a lot of fund manager-type clients taking in those SWIFT messages, and if cash management’s really important to them, it’s all about getting the real-time messages back. So as soon as those acknowledgements have come back in the SWIFT network infrastructure, then they’re straight back out the door. There’s no reason a client can’t come in the next day and know their actual positions.”

Drew Vaughan, a consultant in institutional superannuation, notes that while decisions on term deposits are easy for custodians because the settlement process with the ADI is efficient, it’s harder for asset owners to convert a decision into an instruction.

“The conversion of the decision into an instruction that goes to the custodian is the clunky bit,” Vaughan said. “That’s the bit that often takes the time and is potentially later in the day, and potentially the bit that can give rise to some failure on settlement because timing isn’t met.”

To that end, Cashwerkz chief executive Hector Ortiz noted that the company’s platform passes compliance hurdles in terms of ADI partners and then improves the efficiencies of the workflows for the custodians and asset owners.

“As we were talking to the market about this product, the value is in four key areas,” Ortiz said. “So, it’s the rates gathering, which is very important because custodians struggle to have the resources to gather rates on behalf of a fund manager that already has a rate in its mind and needs to check it to see if a custodian can do that, so that’s number one. And number two is about the delivery of the instructions in a secure manner, highly efficient, etc. Number three is all about the reporting or exporting of the data externally, and then we’ve got this regulatory requirement around compliance, because what’s coming out of the [Hayne royal commission] is very interesting with regards to best interests. So how do you demonstrate best interests? And I think my view is that anybody who manages clients’ money is going to have to show how they execute [acting in clients’] best interests.”

Cashwerkz gathers term deposit rates in real time, and offers secure communication of the instructions between the asset owner client, its fund manager, the custodian and the ADI that offers the term deposit.

This real-time transparency and secure, efficient communication around allocations to term deposits comes at a time when cash options, and therefore cash management, are receiving greater attention from superannuation fund members approaching retirement.

Retention opportunity

Cash management has been seen as a “necessary evil rather than something to optimise” by superannuation funds in the past, said John Powell, general manager of deposits at ME Bank. However, that may change as the superannuation industry moves from the accumulation business to the pension business. To that end, superannuation funds may start seeing cash management as “more of a retention opportunity for the fund”, which will mean offering more competitive cash returns, with increased efficiency and the ability
to transact instructions more easily.

Mine Super’s Collins noted that the fund offers individualised term deposits as part of its post-retirement strategy. It states that self-managed super creates “a flight risk” for members aged 45 to retirement, but another trend is the unwinding of self-managed super arrangements at retirement, which has led the fund to dedicate a post-retirement team to paying attention to that strategy.

“Part of that is a retention strategy,” Collins said. “There’s no doubt about it, because we have high-net-worth members talking to people and saying, why can’t I do this? It’s not necessarily something the investment team would endorse, but as part of a member-focused fund, it’s something we do and will continue to do.”

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Investment Magazine provides in-depth, monthly analysis of trends and developments for all the businesses in which superannuation funds engage‚ including asset allocation, investment manager selection, custody and fund accounting, member administration, group insurance and compliance.